November 9, 2016
Dear Fellow Shareholder:
The third quarter was Paragon’s third consecutive quarter of record-breaking profitability. Net income increased 10.6% to $599 thousand for the third quarter compared to $542 thousand during the second quarter of this year. Net income for the third quarter was significantly higher than the third quarter of 2015 when we were starting the Small Business Capital Group. Year-to-date net income through September 30, 2016, is $1.6 million compared to a loss of $178 thousand through the first nine months of 2015.
Highlights of the 3rd quarter included:
- Total revenue for the third quarter was a record $4.8 million, increasing $170 thousand over the second quarter. Through three quarters of 2016, revenue has increased 43%, or $4.1 million.
- The net interest margin for the third quarter increased to 4.17% from 4.06% in the second quarter and 3.67% during the third quarter of 2015.
- Net interest income increased 27% over the second quarter of 2016 and is 27% higher than the first nine months of 2015.
- For the third quarter, noninterest income increased slightly over the second quarter of this year. Year-to-date, noninterest income has increased $2.1 million, or 97%, over the first nine months of 2015.
- Noninterest expense has increased 6.9% during the first three quarters of 2016 compared to the same period in 2015. The primary reasons for the increase were the startup of the Specialty Lending Department and the increased incentive pay tied to the increased revenues recognized thus far this year.
- The efficiency ratio, which is the ratio of expenses to income, was 75.70% for the third quarter and was essentially unchanged from the second quarter. For the first nine months of 2016, the efficiency ratio was 76.15% compared to 101.91% during the first nine months of 2015. During the first three quarters of 2016, revenues have increased 43%, while expenses have increased 6.9%.
- The return on assets (ROA) for the third quarter of 2016 was .74% while the return on equity (ROE) was 6.76%.
- Gross loans increased $10.4 million, or more than 15% on an annualized basis, during the third quarter of 2016. Year-to-date through September 30, 2016, loans have increased $36.1 million, or 14.7%. This level of growth has outpaced the overall growth in the Memphis area.
- As Paragon has had more years of operating history, we have diversified our loan portfolio. At September 30, 2016, no one type of loan comprised more than 25% of the total.
- Demand deposits increased $4.6 million, or 6.9%, during the third quarter. Year-to-date, demand deposits have increased $9.4 million, or 15%. Paragon’s ratio of demand deposits to total deposits at 21.8%, remains high in comparison to peers.
- Core deposits, which exclude brokered deposits, have increased $16.2 million, or 7.1%, during the first three quarters of 2016. This growth rate is estimated to be well in excess of the overall market.
- The book value of Paragon shares has increased from $7.94 at December 31, 2015, to $8.37 at September 30, 2016, or at an annualized growth rate of almost 7.3%.
- The ratio of nonperforming assets to total assets decreased from .70% at June 30, 2016, to .64% at September 30, 2016.
- Despite continued improvement in asset quality, the allowance for loan losses has increased slightly from 1.37% of gross loans at June 30 to 1.38% at September 30. At December 31, 2015, the ratio was 1.17%.
During the 3rd quarter, we were pleased to be named a finalist for the Memphis Business Journal’s Best Places to Work competition. Paragon is the only bank, and one of only two organizations in Memphis, which has won or been a finalist every year the competition has occurred. All nominated companies participate in an anonymous employee engagement survey conducted by a research firm. We continue to believe highly-engaged employees create satisfied customers which leads to higher profitability.
Robert S. Shaw, Jr. Michael A. Edwards Lewis W. Perkins, III
Chief Executive Officer President and Chief Operating Officer Chief Financial Officer